The Digital Service Tax To Do More Harm Than Good

The government of Kenya already gazetted the implementation of the Digital Services Tax. Despite the noise, cries, shouts, and wailing from the stakeholders who felt the tax misses the point and ill-timed, the deaf ears of the government heard none of it.

And so, starting January 1, the Digital Service Tax will come into effect, as passed in the Finance Act 2020, payable at 1.5 percent of the gross transaction value of service due at the time of transfer of the payment to the service provider.

The Kenya Revenue Authority seems excited, happy, jumping up and down as it prepares to start taxing digital marketplaces in the country. But taxing the digital economy is a complex policy issue world-wide, and countries are taking time to find the right fit.

From the look of things, KRA is not prepared. But they are determined to do it without knowing how. To them, their eyes are fixed on the 2 billion shillings they say they are targeting to collect courtesy of Digital Service Tax. But they just don’t know how to.

The truth is, the implementation of DST is going to do more harm than good, especially for companies that are operating locally. Foreign giants like Amazon, Facebook, and Twitter are going to have a field day, getting billions of shillings as locals struggle and wallow in poverty.

Although KRA claims that the 1.5 percent DST will apply uniformly on both the local and foreign players, it is obvious that KRA has no plans and mechanisms for taxing foreign players.

First, these foreign e-commerce platforms have no offices in Kenya, therefore, not easy to know what they sell, how much they all together in order to tax them. Furthermore, they operate from very different tax jurisdictions in their own countries of origin.

It is a fact that the Big Tech industry mines a lot of Kenyans’ personal data from social media platforms, online sites, and videos and uses the same data to sell to advertisers making millions of dollars.

Why wouldn’t the government first target these companies first and charge them money for exploiting Kenyans data instead of going after small nascent businesses especially in these hard economic times?

It is instructive that we are not told how this tax will be used to promote growth in this sector. One suspects, the money is meant to just go towards repayment of irresponsible debts that we have taken on as a country.

The digital services tax is just another example of how out of control this government has become in imposing taxes on Kenyans.

The OECD says that Kenyans are now the third most highly taxed people in Africa and we probably rank as high, in terms of corruption and theft of these taxes from public coffers.

This means that if KRA is going to implement DST, then it is for the local e-commerce platforms. They are going to be sacrificed and carry the burden of others. Why? Just by being Kenyan? There is no doubt that the move is going to kill the digital footprint that had taken shape across the country.

Introducing a 1.5 percent tax is simply a price distortion, heavily impacting the thin margins. An increase in price through taxation will reduce the number of customers using the platform, thus hurting their margins badly.

This price distortion is not confined to the e-commerce space but the entire digital services liable. This will have a negative impact on the sustainable digital economy Kenya has been trying to build.

“Our work is to implement the law the way it is. The law is already there and comes January, we are rolling it out the way it is,” said Mr. Omondi when asked whether there was room for negotiations before the implementation of DST.

READ: KRA At Pain To Explain Plan To Rollout DST As Players Term It Counterproductive